CESS OR STRESS? UNDERSTANDING THE ISSUES SURROUNDING THE BUILDING AND OTHER CONSTRUCTION WORKERS

Transcription

1 CESS OR STRESS? UNDERSTANDING THE ISSUES SURROUNDING THE BUILDING AND OTHER CONSTRUCTION WORKERS By: Ranjit Prakash, Arun Mani and Anshuman Pande* ABSTRACT: This article seeks to examine the problems regarding the implementation of the Building and Other Construction Workers' (Regulation of Employment and Conditions of Service) Act, 1996 (the "BOCW Act") [1] and the Building and Other Construction Workers' Welfare Cess Act, 1996 (the "BOCW Cess Act").[2] A number of issues regarding the implementation of the BOCW Act and the BOCW Cess Act (collectively termed as the "Acts") have arisen in recent times, particularly regarding their application to the projects and infrastructure space. Some of the issues have been adjudicated upon, while some are as yet sub judice. Moreover, there have been conflicting interpretations relating certain important provisions of the Acts, some of which are sought to be addressed in this article. COVERAGE AND SCHEME OF THE ACTS: The BOCW Act is stated to be a social welfare legislation that aim to benefit workers engaged in "building and construction" activities across the country. The preamble of the BOCW Act explicates the said purpose: "An Act to regulate the employment and conditions of service of building and other construction workers and to provide for their safety, health and welfare measures and for other matters connected therewith or incidental thereto." It may thus be seen that the ambit of the BOCW Act is wide, particularly in a country where the infrastructure and construction sectors have seen significant growth and employ a large number of people which were hitherto unregulated. Welfare Boards were to be set up state-wide under the BOCW Act with a view towards carrying out welfare measures for the building and construction workers across the state. Moreover, the BOCW Act also envisaged comprehensive health, welfare and safety measures to be applicable to a building and construction site and which were to be implemented by the employer' as defined in the BOCW Act.[3] The object of the BOCW Act as well as its framework is analogous to other labour law legislations, but in particular, the BOCW Act is similar to the Contract Labour (Regulation and Abolition) Act, 1970 ("CLRA") and the Factories Act, 1948 ("FA48"). Indeed, at a practical level, it is noticed that many state-level labour and industrial authorities utilize concepts from the CLRA and the FA48, especially for provisions that may overlap.[4] The BOCW Cess Act has been framed as a complementary legislation to the BOCW Act and for the purpose of "augmenting the resources" of the Welfare Boards set up under the BOCW Act. The BOCW Cess Act envisages the levy of a cess of a minimum of 1% of the "cost of construction", to be paid by the employer' to the state authorities.[5] The cess so recovered is to be used for carrying out the statutory functions of the various state-level Welfare Boards. Finally, rules have been framed for operationalising and setting out the procedures to be followed under the Acts. Rules have been framed by the central government for both Acts;[6] however, states are free to promulgate their own rules and many states have proceeded to draft their state-level rules closely aligned to the rules framed by the central government. MEANING OF THE TERM EMPLOYER'[7] The definition of the term employer' has been provided under Section 2(i) of the BOCW Act and states as follows: "(i) "employer", in relation to an establishment, means the owner thereof, and includes,- (i) in relation to a building or other construction work carried on by or under the authority of any department of the Government, directly without any contractor, the authority specified in this behalf, or where no authority is specified, the head of the department;

2 (ii) in relation to a building or other construction work carried on by or on behalf of a local authority or other establishment, directly without any contractor, the chief executive officer of that authority or establishment; (iii) in relation to a building or other construction work carried on by or through a contractor, or by the employment of building workers supplied by a contractor, the contractor." (Underlining supplied) For the private projects and infrastructure sector, the underlined portion, taken together implies that the employer' means an owner of an establishment and includes a contractor. This confusion is further compounded if the definition of a contractor' is observed under Section 2(g) of the BOCW Act: "(g) "contractor" means a person who undertakes to produce a given result for any establishment, other than a mere supply of goods or articles of manufacture, by the employment of building workers or who supplies building workers for any work of the establishment, and includes a sub-contractor." (Underlining supplied) Taken together, therefore, an employer' under the BOCW Act may include either one or more of the following: - the owner (usually the project proponent); and/or - the contractor, using or supplying building workers; and/or - the sub-contractor of the contractor, using or supplying building workers. Pertinent to mention herein is the fact that the role of the employer' is important under the Acts. Among other things, the employer' is responsible for the following (inter-connected) actions: (i) registration of the site under the BOCW Act, to enable it to engage building workers;[8] (ii) overall compliance with the provisions of health, safety and welfare measures stipulated under the Acts and the various rules thereunder; and (iii) payment of cess under the Cess Act. Since the definition of an employer' under the BOCW Act can mean either the owner, contractor or a sub-contractor, the two scenarios that may emerge therefore is: (a) either any one of the three may register themselves as an employer' under the BOCW Act (in the case of infrastructure projects, it may practically be the owner due to its overall control over the project); or (b) both the owner as well as the contractors (including sub-contractors) may register themselves as employer' under the BOCW Act, based on the number of the building workers and the respective scope of works. The latter scenario appears to be the one favoured by most labour authorities and even the various High Courts since it ensures that the coverage of the stipulations is broad-based, particularly with respect to the cess and penalties for non-compliances are collective. To this end, the Hon'ble High Court of Delhi, in the case of Builders Association of India & Ors. v. Union of India & Ors.[9] held that: "There appears to be a definitive scheme in the definition itself. A range of choices has been made available to the government for levying cess and the intention is not to confine it only to the owner of a building or the person expending for the construction. The idea is to seek to levy and collect the cess from the contractor or the owner as the case may be. It is not possible to accept the [..] submission that both the contractor and the owner would be taxed vis-à-vis the same construction activity." (Emphasis supplied)

3 For the sector, there may also be some merits in the latter scenario, particularly in the turnkey projects space wherein the owner usually employs lesser building and construction workers than its turnkey contractor/sub-contractors and it may make more sense for the person actually carrying out construction activities to be liable under the Acts. However, practical difficulties have arisen due to the imposition of the cess under the BOCW Cess Act over the employer' as defined under the BOCW Act. Since the cess is leviable over the cost of construction' i.e. all expenditures incurred by the employer'[10] (an aspect which would be examined in detail further), the authorities would have to calculate the cost of construction' for each particular employer' registered under the BOCW Act to calculate the corresponding amounts of cess. This shall be difficult in contracts wherein a turnkey contractor manages the entire works on-site on behalf of the owner (in which case, the cost of construction shall substantially overlap) or, correspondingly, where a sub-contractor manages a portion of the works on behalf of a larger contractor. The owner or even the turnkey contractor may predominantly be in a supervisory capacity and employ only a few building workers but may still be obligated to pay a larger amount of cess than other subcontractors. Regarding the health, safety and welfare obligations under the BOCW Act and the rules framed thereunder, such measures are inter-linked between parties on project sites and in a case of a large number of contractors and sub-contractors, it is difficult to demarcate and hold one contractor/sub-contractor responsible for the compliances. The solution for the owner and the contractors to avoid inter-se disputes can be to make provisions in the contracts to demarcate such obligations. However, this would still leave the question of "which party shall be liable qua the authorities in case of non-payment of cess and non-compliance with the BOCW Act?" In case of multiple employers registered with the authorities, differentiation of obligations, it is reiterated, shall have to be crucial and shall not be helped with parties trying to downplay their own obligations and amplifying the obligations of the others - particularly since noncompliances may lead to criminal and civil penalties under the Acts. In an infrastructure project, the project proponent, turnkey contractor and/or other contractors have differentiated responsibilities and scope of works. The ambiguities in the BOCW Act, in the opinion of the authors, arise from categorizing all of the said entities as employer' and thereafter, making the employer' solely responsible for all of the obligations under the Acts - obligations which are practically diverse and usually "passed down" vide "back-to-back" arrangements amongst all the entities involved in the project. It shall be the job of the authorities to distinguish obligations and the cost of construction' from the contracts and thereafter demarcate liabilities. This, in turn, may lead to allegations of misapplication and miscalculation of the cost of construction.' Therefore, it is the opinion of the authors that scenario (a), wherein only the owner of the project registers itself as an employer', appears to be a more practical proposition to overcome such ambiguities. Since all activities on-site are being carried out for the owner, the owner shall be in the most desirable vantage point to supervise and ensure compliances of the BOCW Act and the most authoritative cost of construction' for the cess shall be, in any case, the cost of construction' from the owner's perspective. In other words, the "first point of responsibility" would be that of the owner. In a sense, this scenario is akin to the concept of one "principle employer" under the CLRA. Under the CLRA, the "principal employer" registers the site with the labour authorities and verifies the registration of the contractor.' The CLRA envisages that the health, welfare and payment obligations vis-à-vis the contract labour shall be primarily that of the contractor'[11] but also makes the "principal employer" liable to "step-in" into the shoes of the contractor in-case the contractor' fails to carry out such obligations. This approach is attractive from the point of view of practicality and convenience - while the contractor' under the CLRA has the primary liability of ensuring the welfare of his employees and has exhaustive registration requirements, the "principal employer" is the overall site in-charge (by virtue of the registration of the site by the "principal employer") and is also enjoined to supervise compliance by the contractor and to make good any failures arising out of the contractors' default.[12] The "principal employer" shall ensure adherence by contractors by providing appropriate compliance obligations in the contracts. In fact, it is argued that this aspect of the CLRA is already becoming a part of the BOCW Act as explicated by the Hon'ble High Court of Punjab & Haryana in Adani Agri Logistics Ltd. v. State of Haryana.[13]In the aforesaid decision, the Court had stated that the owner cannot be excluded from the coverage of the BOCW Cess Act and the cess shall be recoverable from the owner, in case no other party pays the same. The owner was held to be free to recover the amount from the contractor, vide inter-se arrangements. In fact, in the said case, the Hon'ble Court even went so far as to justify the above stand by stating that the "role of the owner was akin to the role of principal employer under the scheme of the Contract Labour (Regulation and Abolition) Act, 1970." States like Punjab have already added the term principal employer' in its rules framed under the BOCW Act[14] and more states may follow.[15] CONNOTATIONS TO THE TERM COST OF CONSTRUCTION' Section 3(1) of the BOCW Cess Act states as follows: "(1) There shall be levied and collected a cess for the purposes of the Building and Other Construction Workers (Regulation of Employment and Conditions of Services) Act, 1996, at such rate not exceeding two per cent, but not

4 less than one per cent, of the cost of construction incurred by an employer, as the Central Government may, by notification in the Official Gazette, from time to time specify." Moreover, Rule 3 of the Building and Other Construction Workers Welfare Cess Rules, 1998 states as under: "3. Levy of cess. - For the purpose of levy of cess under sub-section (1) of section 3 of the Act, cost of construction shall include all expenditure incurred by an employer in connection with the building or other construction work but shall not include- - cost of land; - any compensation paid or payable to a worker or his kin under the Workmen's Compensation Act, 1923." Relying on the above-mentioned definitions, a Division (two-judge) Bench of the Hon'ble High Court of Madhya Pradesh pronounced judgments in two similar writ petitions namely M/s G.V.P.R. Engineers Limited v. State of Madhya Pradesh & Others and M/s Technical Associates Limited v. The Assistant Labour Commissioner, Jabalpur & Others.[16] The judgments were similar in their ruling and based on similar facts. For construction of various projects in Madhya Pradesh, the civil/erection contractors for electrical works entered into turnkey agreements with the owners. The turnkey agreements, in the price clauses, differentiated between the prices of civil works and supply works. The owners of the said contractors were public sector enterprises. The owners deducted, from the bills submitted by the contractors, the building and construction cess on the entire contract price (i.e. the price including both the service and supply portions). The said contractors contended that the cess was deductable only on the service portion of the contract price and not on the supply portion. The owners and the state government disagreed. The High Court, holding in favour of the employers, opined as under: "A joint reading of the above quoted Section 3 and Rule 3 shows that cess levied not less than one per cent of the cost of construction incurred by the petitioners as employers is payable by them. The cost of construction cannot be divided in parts, as argued by the petitioners, into supply portion and erection portion. Even the cost for supply portion is incurred by the petitioners and cannot be separated from the total cost incurred (in the price clause of the contract). The cess is on the total cost of construction. The definition of cost of construction in Rule 3 excludes only cost of land and any compensation paid or payable to worker or his kin under the Workmen's Compensation Act, The expression "expenditure" in Rule 3 does not obviously include cost of land even so it is specifically excluded in the proviso to the Rule. If the intention of the Cess Act and Cess Rules was to exclude the cost of supply part, it would have been referred in Rule 3 where exceptions are provided." (Emphases supplied) In essence, the High Court held that cost of construction' would include costs incurred by the contractors for both the service as well as the supply portions. In fact, all scope of works not specifically excluded by Rule 3 of the BOCW Cess Act would be included in the cost of construction.' The High Court appears to have been guided by a plethora of decisions of the Hon'ble Supreme Court as well as other High Courts which have conclusively stated that labour legislations, which have social welfare as their purpose, have to be interpreted in broad terms and interpretations that shall result in greater inflows of the cess should be encouraged.[17] It may be pertinent to add herein that the practice of splitting infrastructure contracts into service and supply contracts is a well-entrenched one in India. In fact, contracts may be further split into "off-shore" and "on-shore" contracts for services and supplies, usually with "umbrella agreements" for tying in the contracts. It is the respectful opinion of the authors that the ratio decidendi of the Hon'ble High Court of Madhya Pradesh overlooks certain important points: (i) Section 2(d) of the BOCW Act provides the definition of "building and other construction work" (which was also noted by the High Court). The said section is reproduced below: "2(d) "building or other construction work" means the construction, alteration, repairs, maintenance or demolition, of or, in relation to buildings, streets, roads, railways, tramways, airfields, irrigation, drainage, embankment and navigation works, flood control works (including storm water drainage works), generation, transmission and distribution of power, water works (including channels for distribution of water), oil and gas installations, electric lines, wireless, radio, television, telephone, telegraph and overseas communications, dams, canals, reservoirs, watercourses, tunnels, bridges, viaducts, aqueducts, pipelines, towers, cooling towers, transmission towers and such other work as may be specified in this behalf by the appropriate Government, by

5 notification but does not include any building or other construction work to which the provisions of the Factories Act, 1948 or the Mines Act, 1952 apply." (Emphasis supplied) Pertinent to note that the emphasized portion specifically uses terms like construction', alteration', repairs', maintenance' or demolition' and does not include terms even ejudsem generis to supply. The focus of the BOCW Act and even the rules framed thereunder, is entirely upon the welfare measures for workers engaged in such activities and arguably, there are no measures specific to workers engaged purely in supply activities. This invariably leads to the interpretation that the scope of the definition of "building or other construction work" was only restricted to erection and construction services (and their cognates like demolition) and did not include other services like supply. (ii) Usually, in large infrastructure projects, portions of services and supplies may be carried out "off-shore", i.e. manufacturing and fabrication may be carried out overseas and thereafter, imported into India. This is especially pertinent to supplies. By holding that cost of construction' includes all costs incurred by the employer, the cess would also be incurred on such off-shore costs. Since the stated intention of the BOCW Cess Act is the augmentation of the funds of the Welfare Boards set up for domestic workers who work for the sector in India, it is debatable whether levying cess on the off-shore element was envisaged under the BOCW Cess Act. (iii) Finally, the applicability of the BOCW Act (and by extension, the BOCW Cess Act) was over sites that had ten (10) or more workers (whether hired directly or through contractors) employed in "building or other construction works" (Section 1(4) of the BOCW Act). Personnel involved in supply for construction projects are mostly off-site' (in transportation, warehousing etc), with only a minimal involvement of on-site' personnel - generally in unloading the supplies on-site. It may be argued that the impact of the said decision may be to include even personnel engaged in manufacturing and transporting the supplies - which class of workers are not covered under the Acts and indeed, shall not be allowed to benefits from the state-level Welfare Boards.[18] CONCLUSION The biggest difficulty in comparing the Acts to legislations like the CLRA and the FA48 is that the latter legislations are well-entrenched and backed by a catena of precedents explaining most ambiguities therein. The Acts, on the other hand, remained virtual dead letters' from 1996 to the latter part of the first decade when the provisions of the Acts started being implemented by various states. Even now, most infrastructure contracts do not provide for the inter se arrangements relating to cess payable by a project and such factors lead to ambiguities and may increase the scope for disputes. The authors anticipate that greater clarity will follow with greater implementation of the Acts. However, there are ambiguities in the Acts - two of which have been highlighted above. There is a need for the legislature or the Hon'ble Supreme Court of India to clarify the same expeditiously for better implementation of the Acts and for the sector to attain clarity on the issues. REFERENCES * Ranjit Prakash is a Partner at HSA Advocates and heads its Project Advisory and Alternate Dispute Resolution practice. Arun Mani is a Senior Associate and Anshuman Pande is an Associate at the firm - both are part of the firms Project Advisory group. The authors would like to acknowledge the contributions of Prakhar Bhardwaj of the National Law University, Jodhpur. They can be contacted at mail@hsalegal.com [1] Act number 27 of 1996 [2] Act number 28 of 1996 [3] The ambiguities surrounding the meaning of the term employer' has been examined subsequently in this article.

6 [4] It may be noted that the Hon'ble High Court of Orissa in the matter of Sterlite Energy Limited v. State of Orissa & Ors. [reported at 2011 III LLJ 349 (DB)] has held that the provisions of the Factories Act, 1948 and the BOCW Act do not over-lap, holding that the BOCW Act applies to factories under construction while the Factories act, 1948 is generally applicable to completed factories. However, we understand that similar issues are being agitated before the Hon'ble High Court of Chhattisgarh in matter number WP (T) 7484/2010 [titled KSK Mahanadi v. State of Chhattisgarh & Ors.] and the matter is currently sub judice. Unusually, the Hon'ble Supreme Court of India vide its 1999 judgment in the matter of Lal Mohammad v Indian Railway Construction [reported at (1999) 1 SCC 596] held that construction of a railway line of 54 km length constituted a "factory" under the FA48. It is assumed that since the facts in the said matter occurred prior to 1996, hence the BOCW Act was not cited or discussed by the Hon'ble Court, even though it was in force. The authors are of the respectful opinion that, with the coming into force of the BOCW Act, the said ratio may be distinguishable on facts. [5] Section 3(1) of the BOCW Cess Act read with Rule 3 of the Building and Other Construction Workers Welfare Cess Rules, Please note that under Section 2(d) of the BOCW Cess Act, all terms which have not been defined in the said act are to have the meaning under the BOCW Act. The issues with respect to the term "cost of construction" have been examined subsequently. [6] Refer to the Building and Other Construction Workers' (Regulation of Employment and Conditions of Service) Central Rules, 1998 and the Building and Other Construction Workers Welfare Cess Rules, [7] The definitions of "building worker" (Section 2(e) of the BOCW Act) and establishment' (Section 2(j) of the BOCW Act), although important for a holistic understanding of the BOCW Act, have not been discussed, being beyond the scope of this article. [8] Section 7 of the BOCW Act. [9] Reported at (139) 2007 DLT 578 (DB) [10] Rule 3 of the Building and Other Construction Workers Welfare Cess Rules, [11] Like the BOCW Act, the definition of a contractor' under Section 2(c) of the CLRA includes a sub-contractor. [12] Qua the contractor, the principal employer is entitled to recover all expenses arising out of the principal employer making good the defaults - refer to Ss. 20 and 21 of the CLRA. [13] Reported at 2010 LLR 762. [14] Punjab Building and Other Construction Workers' (Regulation of Employment and Conditions of Service) Rules, [15] It may be added herein that under the Building and Other Construction Workers' (Regulation of Employment and Conditions of Service) Central Rules, 1998, the form for registration of a building and construction site (Form I) is to be stamped and signed by a "principal employer" thus leading to a conclusion that scenario (a) was actually envisaged under the BOCW Act. However, there is no separate definition of a "principal employer" in the BOCW Act itself. [16] Writ Petitions 7303/2011 and 3956/2009 respectively. We understand that the said decision of the Hon'ble High Court may soon be challenged in the Hon'ble Supreme Court of India. However, until such time as the decision is confirmed or reversed, the decision is binding in the state of Madhya Pradesh. [17] Workmen v. American Express Banking Corporation [reported at AIR 1986 SC 458]. The said case was also quoted with approval in the Sterlite case (supra, n.4). [18] Arguably, the sourcing of supplies from registered manufacturing units shall imply that the workers engaged in manufacturing would have, in any case, been covered under other extant industrial and labour legislations. Source: